Joel Beck

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Posts categorized "Broker-Dealer/RIA Rule 3070 Issues"

October 25, 2007

FINRA today announced that it fined UBS Financial Services $370,000 for late reporting of matters on Forms U-4 and U-5. Timely reporting has been a somewhat hot - or at least lukewarm - topic over the past several years, and I suspect it will stay that way.

October 17, 2007

Sometimes you just gotta stand up and fight, and here's a recent case I believe stands for that proposition. FINRA recently announced an Office of Hearing Officers disciplinary decision involving a former UBS broker who claimed that five of his clients were disabled to avoid the clients paying a CDSC (contingent deferred sales charge) to sell out of their "B" share mutual fund positions. The Decision can be found here.

Now what this broker did was certainly not right. But, he apparently did it to serve his clients rather than for a benefit or personal gain. In fact, the hearing panel found that he did not stand to benefit directly or indirectly from his actions, though he knew what he was doing was wrong. The Hearing Panel found that in making this false representation that his clients were disabled to avoid the CDSC charge, the broker violated NASD Rule 2110, and by causing the firm's books and records to be inaccurate in that respect, also violated Rules 3110 and 2110.

Though the decision does not give details into the settlement demands of NASD (n/k/a FINRA) it does report that Enforcement requested that the panel suspend the broker from the industry for two years, and fine him $5,000 because his conduct was "egregious." The hearing panel found the misconduct to be serious and worthy of a significant sanction, but not as significant as that sought by Enforcement. Instead, the hearing panel ordered that the broker be suspended in all capacities for one year, pay a $5,000 fine, and requalify by examination (meaning that he would have to take his Series 7 exam (or whatever he held) over again.

So what's the take-away point on this. To me, its that smart firms and brokers should recognize that sometimes you gotta stand and fight, even when there is no dispute as to the rule violations. Sometimes its OK to refuse Enforcement's settlement demands and roll the dice as this broker did and try to come out better on sanctions. Of course, each case is different and settling vs. litigating should be seriously considered and the costs, risks and rewards of each choice weighed carefully before any decision is made.

September 27, 2007

Last time we covered the basic areas requiring reporting to FINRA pursuant to Rule 3070, noting that many events specified in section (a) require reporting within 10 days. And we noted the broker's obligation to report those items to the firm in a prompt fashion. Today, we'll cover the remainder of the Rule.

The typical quarterly filing requirements come from Section (c) that requires each firm to file quarterly information about customer complaints it has received. This filing is a "statistical and summary" filing. These reports are filed electronically on a FINRA system, and focus on "customer complaints." It is important to understand that a "complaint" is a written grievance involving the firm or any person associated with it. So any complaint, regardless of the merit, and regardless of the nature, has to be reported.

Section (f) requires firms to file with FINRA copies of documents relating to the disclosures if they have not been previously requested from FINRA or, if it is a matter in litigation, is not before FINRA Dispute Resolution. This includes copies of criminal indictments and plea agreements for matters that are reported under 3070(a)(5).

Firms generally find themselves under the microscope for 3070 issues when the regulators discover issues where Forms U-4 and U-5 have not been filed and amended properly and timely. From there, the examiners may review 3070 filings and reports, and Enforcement may pursue action for failure to file, or for late or incorrect filings.

September 25, 2007

Previously, we've posted about Form U-4 disclosures, selling away, and outside business activities, and the reporting requirements of those Rules. In today's post, we briefly review another reporting requirement rule, FINRA Rule 3070.

FINRA (formerly NASD) Rule 3070 imposes an obligation on firms to report to FINRA the existence of a number of specified conditions, such as complaints made against a broker or firm, a broker's bankruptcy, certain criminal or civil charges against the broker or firm, or certain events relating to businesses and organizations under the broker's control. See Rule 3070(a) for a listing of the specific items covered under that section of the Rule here. (The Rule also requires a firm to provide quarterly reports about customer complaints, and to file with FINRA copies of certain documents relating to litigation, arbitration, and criminal matters - we will cover those topics in future posts.)

Importantly, the Rule in paragraph (b) requires brokers to report these 3070(a) items to their firm promptly, and requires the firm to report it to FINRA within 10 days after it learns, or should have learned, of the event. But, the reporting requirements do not end there. If the matter related to the conduct of a broker, most of these items will require an amendment of the broker's Form U-4, and that has to be done in a timely fashion as well. So when firms miss their reporting obligations, the violations - and sanctions - stack up and firms get charged with failing to amend Forms U-4 and with failing to file the 3070 reports.

To help avoid problems in this area, firms should note the different time periods involved between U-4 reporting and 3070 reporting. And, firms should ensure that their reps. understand what has to be reported up to the firm, and when.

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